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DERIVATIVES
Derivatives
Equities,
Derivatives
TYPES/KINDS OF FINANCIAL
DERIVATIVES
Forward
Future
Options
Swaps
FORWARD CONTRACT
Oldest
derivatives
FUTURE CONTRACT
It
Types;
Financial future
Commodity future
Forward contract
Future contract
1. Nature
Not standardized
Highly standardized
2.Existence of
secondary market
No secondary market
Existence of
secondary market
3.Settlement
On the date of
maturity
On a daily basis
4.Modus operandi
Through Financial
intermediary
Through exchanges
5.Down payment
No down payment
6.Delivery of the
asset
OPTIONS
Option
The
Types;
Call option (buy)
Put option (sell)
Double option (buy and sell)
In the money option(positive cash flow to holder)
At the money option (zero cash flow)
Out of the money option (negative cash flow)
Forward contract
Option contract
1. Nature
Not standardised
Both standardised
and not standardised
2.Down payment
No down payment
3.Settlement
At the date of
maturity
At the time of
exercise or maturity
date
4.Linearity
Linearity
Non-linearity
SWAP
FEATURES OF SWAP
1.
2.
3.
4.
5.
Basically a forward
Double coincidence of wants
Necessity of an intermediaries
Settlement
Long term agreement
OPTION RATING
Basis
Call (Buy)
Put (Sell)
Equation
S-K
K-S
S>K (+)
K>S
S=K (0)
K=S
S<K (-)
K<S
S = MARKET PRICE
K = EXCERCISE PRICE OR STRIKE PRICE